Learning From the Past

Terry Flanagan

The regulators mulling the NYSE-Deutsche Borse merger can draw from the lessons learned from stateside exchange consolidation.

“Europe has had the advantage of watching the U.S. regarding exchange consolidation,” said William Brodsky, chief executive of the Chicago Board Options Exchange. “The watched the CME buy the CBOT and how that affected futures and derivatives. They are looking at the issues that would come from combining Liffe and Eurex.”

In 2007, the CME Group acquired the Chicago Board of Trade, which created an entity that dominates futures trading in the U.S. European regulators may be looking to avoid a repeat of that.

However, direct parallels cannot necessarily be drawn between the two markets, and thus the regulators may need to look at the deal in a different light. Clearly, the lingering uncertainty surrounding Mifid and a different mindset regarding clearing have also undoubtedly played a part.

“The regulators are looking at what they can do differently,” said Brodsky. “There is the EU Competition Commission and then another 27 different countries that have to approve the deal.”

Although the focus of the NYSE-Deutsche Borse deal has been the implications it could have on European derivatives trading, there are also potential ramifications to be had in the U.S. options space, as Deutsche Borse’s International Securities Exchange, an options market, is involved.

“This deal also affects our space,” said Brodsky. “This is our peer group, there are five U.S. options exchanges, and it is one of our major competitors.”

Although combining Liffe and Eurex would have created a group that controlled 90% of derivatives trading in Europe, it would have also put the combined entity on even ground with the 800-pound CME and potentially help to create a greater competitive balance on a global level.

EU Competition Commission head Joaquin Almunia is expected to recommend blocking the proposed $17 billion merger between NYSE and Deutsche Borse during a commission meeting on Feb. 1, according to reports. All 27 of the commissioners would then review the recommendation and the commission’s findings before a final decision is made Feb. 9.

The chief executives of NYSE and Deutsche Borse, Duncan Niederauer and Reto Francioni, respectively, met on Wednesday to discuss the next steps to take in order to salvage the deal. They will look to lobby the remaining commissioners for their approval.

In December, the merger parties submitted a second round of remedies to address any remaining concerns. Among the proposed concessions was the divestiture all of the NYSE Liffe-operated European single equity derivatives business, including those in Amsterdam, Paris, Brussels and Lisbon. They will also offer to whoever ends up purchasing the single equity derivatives business access to Eurex Clearing.

Despite the new round of concessions, the commission’s main concern regarding the dominance the combined entities would have in European derivatives was not addressed. Combined, they would have control of more than 90% of European derivatives trading. Both parties have said that they would not include their Liffe and Eurex units in their remedies, citing that the merger would no longer make sense for them if they were asked to give up too much.

U.S. Department of Justice in late December gave the green light on the proposed merger, contingent on the International Securities Exchange, a unit of Deutsche Borse, divesting its stake in Direct Edge.

NYSE and Deutsche Borse agreed to their $17.7 billion merger in February, with shareholders approving the deal in July. Regulators outlined their objections in a statement in early October, with oral hearings held later that month. Their initial batch of remedies was submitted in mid-November. The companies expect to save as much as $3 billion in capital requirements through the deal, as well as reduce any duplicative infrastructures and operations.

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